Ask the Life Insurance Expert

My husband is 56, diabetic and a smoker, but in reasonably good health. When purchasing a life insurance policy to cover any expenses I may have upon his death, should we buy whole life or term?

First, understand the difference between whole life and term life insurance.

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Whole life is a type of permanent life insurance that covers the insured until death. Term life provides coverage for a certain period of time, such as 10, 15, 20 or even 30 years.

Another big difference between the two is that whole life features a cash value account that grows over time. You can borrow against the cash value, although if you don't repay the loan the death benefit is reduced. Term life has no cash value. You can't withdraw or borrow money from a term life policy.

Because term life has no cash value and it provides coverage for only a specific term, it is far less expensive than whole life. Most people buy term life to protect their families in those critical years before children have graduated from college and there's a mortgage and other family expenses to pay.

Term life isn't a good choice if you want life insurance to pay out no matter when the insured dies. Once the term expires, the coverage ends. So if you purchase a 20-year term life policy to insure your husband's life, but he lives for 21 more years, you will not have coverage.

However, many term life policies have a conversion feature, which means you can convert them to a permanent policy at some point during the term without undergoing another medical exam. That feature would come in handy if the insured person's health deteriorated, making it difficult to qualify for decent life insurance rates down the road. It also is beneficial for young people buying life insurance, allowing them to convert to the more-expensive permanent coverage as their earnings grow.

Before you shop for life insurance, do a thorough needs assessment. Why do you need coverage, and how much do you need? The smallest policy available from most major life insurance companies is $25,000. Some smaller life insurers sell smaller whole life policies and market them for funeral, burial or final expenses. Generally these policies are "guaranteed acceptance," which means applicants don't have to get a medical exam or answer lengthy health questionnaires to get coverage. This is an advantage for someone with a lot of health problems, but relatively healthy people can get a better deal per $1,000 of coverage if they buy a larger life insurance policy and undergo the medical underwriting process.

Talk to a financial adviser you trust about various options for long-term planning before you get life insurance quotes.

For more, see Life insurance basics.

Last updated: Apr. 9, 2012
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